Intuit, the tax preparation giant, performed a public service last week by announcing its exit from a federal program that let some Americans use a free version of its TurboTax software.
With this move, the company is making clear what has always been true: Intuit and the rest of the tax prep industry want Americans to pay to file their taxes.
By abandoning the pretense of good citizenship, Intuit is clearing the way for the federal government to do what it should have done long ago: create a public website where most Americans can prepare and file income tax returns at no cost.
In countries such as Japan, the Netherlands and Britain, most taxpayers don't file tax returns. The government withholds taxes from wage income and handles the paperwork. People with more complicated finances still need to fill out forms and submit them, but everyone else can simply check the government's math and move on with their lives.
In the United States, a strange coalition has repeatedly prevented the creation of a similar system. Tax preparation companies loudly protest the unfairness of the government undercutting profits by making it easier to deal with the government. They have won support from anti-tax zealots like Grover Norquist who say that making it easier to pay taxes would also make it easier to raise taxes. The IRS has joined the resistance at critical moments, fearing that it will receive new responsibilities without new funding.
In 2002, the Bush administration scuttled a plan to create an "easy, no-cost" system for filing taxes online after fierce opposition from that coalition of the unwilling. To make the government's surrender politically palatable, the tax prep industry signed a deal with the IRS. In exchange for the agency's promise to do nothing, the companies agreed to offer free versions of their tax preparation software to most taxpayers.
For the last two decades, that Free File program has failed to serve most Americans. Seventy percent of taxpayers are eligible to use it. But in 2019, the last year for which data is available, only 2.4% did so, according to a federal review.
The IRS, starved for funding, has not paid to advertise the Free File program since 2014. The companies, naturally, aren't trying either. They'd rather charge people for the same service. Indeed, dogged reporting by the journalism nonprofit ProPublica has shown the ways that Intuit, in particular, tried to steer people to pay for tax preparation.
In 2019, ProPublica reported that Intuit added lines of code to the free version of its TurboTax website so that the site would not appear in search results on Google.
The companies say the government is saving money by staying on the sidelines. But it is saving that money at the expense of taxpayers. The federal review estimated 14 million Americans paid for a tax prep program in 2019 even though they were eligible to use a free version of the same program. Intuit makes money charging for what should be a free service.
The government's dependence on private tax preparation websites is also impeding the distribution of monthly payments to families with children under a new federal program. The Biden administration and its allies in Congress set up the payments as a tax credit. People who filed federal income tax returns receive the money automatically; people who don't owe taxes can claim the benefit by filing a simplified return. But because the government doesn't have its own tax preparation site, it is stuck referring people to Intuit's shoddy site, which among other shortcomings is not optimized for mobile phones or available in Spanish.
Last year, after the IRS tried to strengthen the Free File program, the second-largest provider of tax prep software, H&R Block, announced that it was dropping out. Now Intuit, whose TurboTax software is used by more Americans than any other tax filing program, is leaving too.
This should not come as a surprise. The Free File program was designed to fail. Anything that makes it more useful for American taxpayers makes it less useful for tax preparation companies.
Intuit, which advertises a "free, free, free, free" version of its TurboTax software, says that it will still offer free tax filing, though not as part of the Free File program. Intuit says it will be able to offer a better service to customers outside the strictures of the government program. But the company makes money by charging for extras, like advice.
It is free to try. And the government needs to create an alternative that's free to use.
A number of smaller companies still offer tax preparation websites as part of the Free File program. But it would be a mistake to keep the program alive. The government's bargain with industry is fundamentally rotten. It makes no sense to pressure companies to undermine their business when an easy alternative is readily available. The IRS can create its own software — or it could license a private program and offer it as a public service.
Austan Goolsbee, a onetime economic adviser to President Barack Obama, estimated in a 2006 analysis that a government system for filing simple tax returns could save lower-income households roughly $2 billion per year on tax prep fees — not to mention the millions of hours of recordkeeping and paperwork that would no longer need to be done.
Sen. Ron Wyden, D-Ore. and the chairman of the Senate Finance Committee, has called for Congress to fund the development of a free filing program. A vehicle is now at hand: Democrats want to pass an increase in funding for the IRS this year to repair the agency's ability to collect taxes from the wealthy. They should add a little more money so the agency can ease the burden of tax filing for everyone else.